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The Euro and Fiscal Policy

The Euro and Fiscal Policy

(p.287) 8 The Euro and Fiscal Policy
Europe and the Euro
Antonio FatásIlian Mihov
University of Chicago Press

The creation of a single currency in Europe has been accompanied by some major changes in the institutional setting for fiscal policy. This chapter shows the new institutional framework that has led to a change in the conduct of fiscal policy in the members of the euro area. The run-up to the launch of the euro was difficult and driven by the strict criteria defined by the Maastricht treaty. The Stability and Growth Pact (SGP) was intended to be conducive to an environment of discipline, coordination, and stability, its constraints became binding for several countries and presented challenges to macroeconomic stability and to the credibility of the pact at the very early years of the European Monetary Union (EMU). This chapter reviews the behavior of fiscal policy after the introduction of the euro in several dimensions: procyclicality, volatility, coordination, and the role of automatic stabilizers and characterizes how the common currency and the constraints associated with the Stability and Growth Pact have shaped fiscal policy among the members of the union.

Keywords:   euro, single currency, fiscal policy, macroeconomic stability, pact

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